By Richard R. Hammar, J.D., LL.M., CPA

© Copyright 2001 by Church Law & Tax Report.  All rights reserved.  This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service.  If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m96 c0103

The Clergy Housing Allowance Clarification Act of 2002. In 1971, the IRS ruled that the nontaxable amount of a housing allowance designated by a church for a minister who owns a home cannot exceed either the minister’s actual housing expenses or the annual “fair rental value” of the home (furnished, plus utilities) In 2000, the Tax Court struck down the fair rental value limit as an unwarranted interpretation of the tax code. Warren v. Commissioner, 114 T.C. 23 (2000). The IRS appealed the Warren case to a federal appeals court. While the appeal was pending, the court openly questioned whether the housing allowance was an unconstitutional “establishment of religion.” In order to prevent the court from addressing the constitutionality question, Congress unanimously enacted the Clergy Housing Allowance Clarification Act in 2002. The Act amends the tax code to reinstate the annual fair rental value limit. In response to this legislation the IRS agreed to dismiss the appeal of the Warren case, and, as a result, the federal appeals court dismissed the case in August of 2002, thus ending the potential threat to the constitutionality of the housing allowance. However, the court left unanswered the question of whether an individual taxpayer has the authority to challenge the constitutionality of the housing allowance.

The Clergy Housing Allowance Clarification Act of 2002 reinstates the annual fair rental value limit as a matter of law, beginning in 2002. In other words, the fair rental value limit will not apply to any pre-2002 returns, with two exceptions: (1) ministers who applied the fair rental value limit in computing their taxes for 2000 or 2001 cannot submit an amended return for either year recomputing their taxes without reference to the fair rental value limit; and (2) ministers who received an extension of time to file their 2001 tax return (until August 15, 2002) must apply the fair rental value limit in computing their 2001 taxes.